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Global Tax practice Tax Treatment of Additional Tier 1 ...

Tax practiceTax Treatment of Additional Tier 1 Capital under basel III Allen & Overy LLP 2013 Global Tax practice | Tax Treatment of Additional Tier 1 Capital under basel III2 ContentsIntroduction 3 Executive Summary 4 Australia 13 Belgium 18 France 21 Germany 24 Italy 28 Luxembourg 32 Netherlands 36 Spain 40 U

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1 Tax practiceTax Treatment of Additional Tier 1 Capital under basel III Allen & Overy LLP 2013 Global Tax practice | Tax Treatment of Additional Tier 1 Capital under basel III2 ContentsIntroduction 3 Executive Summary 4 Australia 13 Belgium 18 France 21 Germany 24 Italy 28 Luxembourg 32 Netherlands 36 Spain 40 United Kingdom 45 United States Tax practice | Tax Treatment of Additional Tier 1 Capital under basel III3In December 2010, the basel Committee on Banking Supervision published basel III: A Global regulatory framework for more resilient banks and banking systems (revised and republished in June 2011).

2 This was followed, on 13 January 2011, with a press release entitled basel Committee issues final elements of the reforms to raise the quality of regulatory capital . These documents comprise basel III and contain rules in relation to how much capital a bank must hold as well as what that capital must look like. The basel III rules are required to be implemented by 1 January 2013. Tax issues associated with capital instruments meeting the basel III standards will be key. Today s globalised banking business requires cross-border solutions particularly for such tax questions. Hence, Allen & Overy LLP s Global Tax practice has prepared a high-level analysis of the most important tax issues for the major European jurisdictions, for the and for Australia.

3 The first version of this brochure was published in 2011. The present updated version includes the latest developments in the relevant jurisdictions, plus a brief analysis of the Buffer Convertible instrument (the terms and conditions of which are included in the brochure on the basis of the common term sheet published by the European Banking Authority). An executive summary and an overview chart summarises the results and outlines the main features for Additional Tier 1 tax experts in virtually all relevant jurisdictions Allen & Overy s Tax practice has a truly Global footprint. In association with our outstanding Banking and Regulatory practice we are in a position to provide seamless cross-border advice on any issue in connection with basel would be pleased if our publication would be useful to you.

4 We are more than happy to discuss with you the topics covered in this publication or any other question you may have on our Breuninger Global Head of Tax Introduction Allen & Overy LLP 2013 Global Tax practice | Tax Treatment of Additional Tier 1 Capital under basel III4 Subordinated to depositors, general creditors and subordinated debt of the bankPerpetual no fixed maturity dateRedeemable after five years with regulator consentNo step-ups in distribution rate or other incentives to redeemDistributions can be cancelled at bank s full discretion without penalty or event of defaultDistributions paid only out of distributable items and cannot be based on the bank s credit standingCannot contribute to liabilities exceeding assets if such a balance sheet test forms part of national insolvency lawConverts into ordinary shares or has its principal amount written down at a pre-specified trigger point only if the instrument is classified

5 As a liability for accounting purposes a write-down must reduce the claim of the instrument in liquidation, reduce the amount repaid when a call is exercised, and partially or fully reduce the distribution payments on the instrumentConverts into ordinary shares or has its principal amount written down at a point of non-viability of the bank this feature may be included in legislation or within the terms and conditions of the instrument, depending on whether the country of the issuer has appropriate legislation in placeCannot contain a feature which hinders the recapitalisation of the bank this may, for example, prevent a temporary as opposed to a permanent write-down mechanismOn-loans in indirect issuance structures must also meet the requirements for Additional Tier 1 CapitalExecutive Summary Under basel III, banks will be required to hold at least 6% of their risk-weighted assets (RWA) in the form of Tier 1 capital.

6 Of that, up to of RWA may be in the form of Additional Tier 1 Capital . An instrument meeting the eligibility criteria for Additional Tier 1 Capital would need to have the following main Tax practice | Tax Treatment of Additional Tier 1 Capital under basel III5 BUFFER CONVERTIBLE CAPITAL SECURITIES EUROPEAN BANKING AUTHORITY COMMON TERM SHEETI ssuer[ ] ( Bank , Issuer )Securities offeredBuffer Convertible Capital Securities ("BCCS")Total issue sizeUp to [ ]Nominal value [ ] Issue priceAt parIssue date[ ] To be determined on a case by case basis minimum requirement: not later than 30 June 2012 Status and subordinationThe BCCS constitute direct, unsecured, undated and subordinated securities of the Issuer and rank pari passu without any preference among themselves.

7 They are fully issued and rights and claims of the holders of BCCS of this issue: are subordinated to the claims of the creditors of the Bank, who are: depositors or other unsubordinated creditors of the Bank subordinated creditors, except those creditors whose claims rank or are expressed to rank pari passu with the claims of the holders of the BCCS holders of subordinated Bonds of the Bank rank pari passu with the rights and claims of holders of other junior capital subordinated issues qualifying as Tier 1 capital have priority over the ordinary shareholders of the BankFor the avoidance of doubt, the BCCS will be treated for regulatory purposes as hybrid instruments and will qualify as Tier 1 amount BCCS holders may claim in the event of a winding-up or administration of the Bank is an amount equal to the principal amount plus accrued interest but no amount of cancelled coupon payments will be of any payment does not constitute an event of default and does not entitle holders to petition for the insolvency of the the event of Conversion of the BCCS to shares, the holders of BCCS will be shareholders of the Bank and their claim will rank pari passu with the rights and claims of the Bank s ordinary shareholders.

8 Allen & Overy LLP 2013 Global Tax practice | Tax Treatment of Additional Tier 1 Capital under basel III6 Maturity dateUnless previously called and redeemed or converted, the BCCS are perpetual without a maturity BCCS will bear an interest of [ ]To be determined on a case-by-case basis minimum requirement: no incentive to redeem to be payment and interest dateTo be determined on a case-by-case basis minimum requirement: dates to be aligned with dividend payment datesConversion rateTo be determined on a case-by-case basis minimum requirement: either (i) specification of a predetermined range within which the instruments will convert into ordinary shares, or (ii) a rate of conversion and a limit on the permitted amount of periodTo be determined on a case-by-case basis.

9 The provisions to be included shall not undermine the conversion features of the instrument and shall not in particular restrict the automaticity of the s call optionThe Bank may, on its own initiative, elect to redeem all but not some of the BCCS, at their principal amount together with accrued interest, on the fifth anniversary or any other Interest Payment Date thereafter, subject to the prior approval of the [name of the national supervisor] and provided that:(a) the BCCS have been or will be replaced by regulatory capital of equal or better quality; or(b) the Bank has demonstrated to the satisfaction of the [name of the national supervisor] that its own funds would, following the call, exceed by a margin that the [name of the national supervisor] considers to be significant and appropriate, (i) a Core Tier 1 Ratio of at least 9% by reference to the EBA recommendation published on xx, or (ii) in case the recommendation referred to under (i)

10 Has been repealed or cancelled, the minimum capital requirements in accordance with the final provisions for a Regulation on prudential requirements for credit institutions and investment firms to be adopted by the European coupon cancellationThe Bank may, at its sole discretion at all times, elect to cancel an interest payment on a non-cumulative basis. Any coupon not paid is no longer due and payable by the Bank. Cancellation of a coupon payment does not constitute an event of default of interest payment and does not entitle holders to petition for the insolvency of the Tax practice | Tax Treatment of Additional Tier 1 Capital under basel III7 Mandatory coupon cancellationUpon breach of applicable minimum solvency requirements, or insufficient Distributable Items, the Bank will be required to cancel interest payments on the Bank has full discretion at all times to cancel interest payments on the [name of the national supervisor] may require, in its sole discretion, at all times, the Bank to cancel interest payments on the BCCS.


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